Topic 7

C H A P T E RC H A P T E RChapterChapterPowerPoints to accompany

Macroeconomics

2TOPIC 7 (Chapters 12-13)

Technology, population growth and the Solow model; ‘new’ vs ‘old’ economies; IT and growth; technology & unemployment

C H A P T E RC H A P T E RChapterChapter

Technological Progress and Growth

1212

© 2007 Pearson Education Macroeconomics, 2nd edition Olivier Blanchard & Jeffrey Sheen 3

Technological Progress and the Rate of Growth

Technological progress has many dimensions. It may mean:

Larger quantities of outputBetter productsNew productsA larger variety of products

Technological progress leads to increases in output for given amounts of capital and labour.

12-1


Technological Progress and the Production Function

Let’s denote the state of technology by A and rewrite the production function as

Y F K N A= ( , , )(+ + +)

A more restrictive but more convenient form isA more restrictive but more convenient form isY F K AN= ( , )

Output depends on both capital and labour, Output depends on both capital and labour, and on the state of technology.and on the state of technology.



Technological progress reduces the number of workers needed to achieve a given amount of output.Technological progress increases AN, which we can think of as the amount of effective labour, or labour in “efficiency units.” in the economy.With constant returns to scale,

2 2 2Y F K AN= ( , )

More generally,More generally,xY F xK xAN= ( , )



The relation between output per effective worker and capital per effective worker is:

t t

t t t t

Y KfA N A N

⎛ ⎞= ⎜ ⎟

⎝ ⎠In words, output per effective worker at time t is a In words, output per effective worker at time t is a function of capital per effective worker.function of capital per effective worker.

YAN

FK

AN=

⎛⎝⎜

⎞⎠⎟,1

which we can redefine aswhich we can redefine as

Note that the growth rate of Note that the growth rate of ‘‘effective effective labourlabour’’ is is ggAA +g+gNN



Output per Effective Worker Versus Capital per Effective Worker

Because of decreasing returns to capital, increases in capital per effective worker lead to smaller and smaller increases in output per effective worker.

f(K/AN)

K/AN

Y/A

N


Interactions Between Output and Capital

The dynamics of output and capital per worker involve:1. The relation between output per effective worker and

capital per effective worker.

I S sY= =

t t

t t t t

I YsA N A N

⎛ ⎞= ⎜ ⎟

⎝ ⎠

Dividing both sides by Dividing both sides by ANAN, we get, we get



2. The relation between investment per effective worker and capital per effective worker.

The dynamics of output and capital per worker The dynamics of output and capital per worker involve:involve:

YAN

fK

AN=

⎛⎝⎜

⎞⎠⎟

Given thatGiven that IAN

sfK

AN=

⎛⎝⎜

⎞⎠⎟

thenthen



3. The investment needed to maintain capital per effective worker from depreciation and growth of effective workers.

The dynamics of output and capital per worker The dynamics of output and capital per worker involve:involve:

( )δ + +g g KA Nor equivalentlyor equivalently

( )δ + +g gK

ANA N

The amount of investment per The amount of investment per effectiveeffective worker needed to worker needed to maintain a constant level of capital per maintain a constant level of capital per effectiveeffective worker isworker is

KggK NA )( ++δ


Dynamics of Capital and Output

At (K/AN)0, actual investment exceeds the investment level required to maintain the existing level of capital per effective worker, K/ANincreases.In the long run, or in the steady state of the economy, capital per effective worker and output per effective worker are constant and equal to (K/AN)* and (Y/AN)*.

gN )K/AN

f(K/AN)

sf(K/AN)

K/AN

Y/A

N

(K/AN)0 (K/AN)*



In steady state, output (Y) grows at the same rate as effective labour (AN); effective labour grows at a rate (gA+gN); therefore, output growth in steady state equals (gA+gN). Capital also grows at a rate equal to (gA+gN).The growth rate of output is independent of the saving rate.Because output, capital, and effective labour all grow at the same rate, (gA+gN), the steady state of the economy is also called a state of balanced growth.



Table 12-1 The Characteristics of Balanced Growth

Rate of growth of:1 Capital per effective worker 0

2 Output per effective worker 03 Capital per worker gA

4 Output per worker gA

5 Labour gN

6 Capital gA + gN

7 Output gA + gN


The Effects of the Saving Rate

The Effects of an Increase in the Saving Rate: IAn increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker.

f(K/AN)gN )K/AN

s1 f(K/AN)s0 f(K/AN)

Y/A

N

K/AN(K/AN)0 (K/AN)1


The Effects of the Saving Rate

The Effects of an Increase in the Saving Rate: IIThe increase in the saving rate leads to higher output growth until the economy reaches its new, higher, balanced growth path.


The effects of the higher depreciation, technological progress or population growth

Higher gA or gN increase the rate of growth of output in steady state. Why?

Higher δ, gA or gN reduce output and capital per effective worker in steady state. Why?

Standard of living improves with higher gA , but deteriorates with higher δ or gN . Why?

Fall in population growth in Africa (through AIDS, wars etc) will lead to a a higher standard of living of survivors in the long run! Why?


The Determinants of Technological Progress

Technological progress in modern economies is the result of firms’ research and development (R&D)activities. The outcome of R&D is fundamentally ideas.Australian firms appear to be lagging in R&D.

Australia spends 1.5% of GDP on R&D (low compared to US, France, UK, Germany & Japan)30% of about 95,000 R&D personnel are employed by firms in Australia. (In US, 75%of 1 million).Australian firms spend 11% of gross investment on R&D. (In US, 20%).

Spending on R&D depends on:The fertility of the research process, or how spending on R&D translates into new ideas and new products, andThe appropriability of research results, or the extent to which firms benefit from the results of their own R&D.

12-2


The Fertility of the Research Process

The determinants of fertility include:The interaction between basic research (the search for general principles and results) and applied research (the application of results to specific uses).The country: some countries are more successful at basic research; others are more successful at applied research and development.Time: It takes many years, and often many decades, for the full potential of major discoveries to be realized.


The Appropriability of Research Results

If firms cannot appropriate the profits from the development of new products, they will not engage in R&D. Factors at work include:

The nature of the research process. Is there a payoff in being first at developing a new product?Legal protection. Patents give a firm that has discovered a new product the right to exclude anyone else from the production or use of the new product for a period of time.


The Facts of Growth Revisited

Capital Accumulation Versus Technological ProgressFast growth may come from two sources:

A higher rate of technological progress, gA

Adjustment of capital per effective worker, K/AN, to a higher level.

12-3


Capital Accumulation Versus Technological Progress

Technological progress accounted for most growth

1950-1973 (1)

1974-2004 (2)

CHANGE (3)

1950-1973 (4)

1974-2004 (5)

CHANGE (6)

Australia 2.3 1.5 -0.8 1.2 1.3 0.1France 4.5 1.7 -2.8 4.0 1.3 -2.8Japan 7.4 2.2 -5.2 6.9 1.3 -5.6United Kingdom 2.5 1.8 -0.6 1.7 1.6 -0.1United States 1.8 1.5 -0.4 1.9 1.1 -0.7Average 3.7 1.7 -2.0 3.1 1.3 -1.8

TABLE 12.2 AVERAGE ANNUAL GROWTH PER WORKER AND TECHNOLOGICAL PROGRESS IN FIVE RICH COUNTRIES, 1950-2004

RATE OF TECHNOLOGICAL PROGRESS (%)GROWTH OF OUTPUT PER WORKER (%)

"Average" is a simple average of the growth rates in each column. "Rate of technological progress" is weighted growth rates of labour and capital subtracted from output growth, divided by a fixed labour share of .7. The data for Japan begins in 1955.

SOURCES: ABS, BEA, BLS, OECD, Angus Maddison"Dynamic Forces in Capitalist Development" (New York: Oxford University Press, 1991).


Capital Accumulation Versus Technological Progress

Table 12-2 illustrates three main facts:1. The period of high growth of output per capita, from

1950 to 1973, was mostly due to rapid technological progress, not to unusually high capital accumulation.

2. Apart from Australia & UK, the slowdown in growth of output per capita since 1973 has come mainly from a decrease in the rate of technological growth, not from unusually low capital accumulation.

3. Convergence of output per capita across countries has come from higher technological progress rather than from faster capital accumulation.


Epilogue: The Secrets of Growth

Differences in output per worker between rich and poor countries are mostly attributed to differences in the measured level of technology across countries. For various reasons, poor countries are unable to close this technology gap.

Reasons include political instability, poorly established property rights, lack of entrepreneurs, and poorly developed financial markets.

12-4


Epilogue: The Secrets of Growth

The poor countries that have grown rapidly in the last 20 years have experienced a rapid accumulation of both physical and human capital.The contributions of both technological progress and capital accumulation to growth depend on the quality of institutions in a country.


Institutions Matter for Growth!

Good institutions: - protection from expropriation - judicial system resolves disputes quickly - laws against insider trading - reliable patent laws - credible anti-trust laws

0

2000

4000

6000

8000

10000

12000

14000

1950 1960 1970 1980 1990 1998

1996

US

dolla

rs

South Korea

North Korea

South Korea relied on a capitalist organization of the economy, with strong state intervention, but also private ownership and legal protection of private producers. North Korea relied on central planning. Growth of GDP per capita was very different!

GDP per capita


Hong Kong, Singapore

Many similarities –• Ex-British colonies, city-states, post-war S China immigrants

• Trading ports with similar industries, but Singapore lagged HK by a decade in its sequence.

Many differences -• HK – minimal government intervention – provided infrastructure and land for

expansion

• SNG – much intervention - I/Y rose from 9% in 1960 to 43% in 1984; forced saving, industrial policy using tax incentives

• gY/N 1970-90: HK = 2.4%, SNG = 1.5%

• gA : HK = 2.3%, SNG = 0.1%

Why the difference? Alwyn Young: SNG moved too fast from one industry to the next – unbalanced growth! Too little gA. . SNG has since taken heed, and has grown well since mid-1990s


Institutions matter! Comparing with China and Taiwan

GDP PER CAPITA (PPP-ADJUSTED) 1950-2001SOURCE: Angus Maddison, The World Economy: Historical Statistics, OECD 2004

0

5000

10000

15000

20000

25000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1999

US

$, P

PP-a

djus

ted

HONG KONG

SINGAPORE

TAIWAN

CHINA

China adopted state planning and communist institutions.

HK, SNG and Taiwan chose the capitalist path with well-enforced property rights.

China became relatively poorer from 1950, and now has a lot of catching-up!

C H A P T E RC H A P T E RChapterChapter

Technological Progress, Wages, and Unemployment

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Dimensions of Technological Progress

QUESTION: Does technology improvement lead to unemployment?

ANSWER: Higher unemployment can only occur in short run, if at all. In medium run, unemployment might even fall!



Technological progress allows more output from the same number of workers2 interpretations:

Optimistic: More output with the same workersPessimistic: Same output with fewer workers

Technological unemployment—a concept associated with the technocracy movement during the Great Depression and the Luddites in the 19th

century—is the argument that unemployment comes from the introduction of machinery.



Technological progress leads to the production of new goods and the disappearance of old ones.The process of growth is fundamentally a process of creative destruction. With technological progress comes a process of job creation and job destruction.


Productivity, Output, and Unemployment in the Short Run

A production function with technological progress can be written as:

Y F K AN= ( , )

Leaving aside matters concerning capital, then:Leaving aside matters concerning capital, then:Y AN=

Output is produced using only labour, Output is produced using only labour, NN, and , and each worker produces each worker produces AA units of output. units of output. Increases in Increases in AA represent technological progress.represent technological progress.

13-1


Productivity, Output, and Unemployment in the Short Run

Then, employment is equal to output divided by productivity, A.

NYA

=

The concern is that, given output, an increase in The concern is that, given output, an increase in productivity decreases the level of employment. productivity decreases the level of employment. This chapter explores this issue, in particular, This chapter explores this issue, in particular, the shortthe short-- and mediumand medium--run responses of output, run responses of output, employment, and unemployment.employment, and unemployment.

ANANKFY == ),(


Technological Progress, Aggregate Supply, and Aggregate Demand

Aggregate Supply and Aggregate Demand for a Given Level of ProductivityThe aggregate supply curve is upward sloping. An increase in output leads to an increase in the price level. The aggregate demand curve is downward sloping. An increase in the price level leads to a decrease in output.



The impact of an increase in productivity on output and employment in the short run depends on how it affects the aggregate supply and aggregate demand curves.

Higher productivity decreases the amount of labour needed to produce a unit of output, resulting in lower cost and a lower price for a given output level. The aggregate supply curve shifts down.



The effects of higher productivity on aggregate demand in the short run depend on the source of the productivity increase:

Technological breakthroughs will bring prospects of higher profits and a boom in investment. The demand for goods rises— aggregate demand shifts to the right.The more efficient use of existing technologies may require little or no new investment. Worries about job security will trigger more saving—the aggregate demand curve shifts to the left.



The Effects of an Increase in Productivity on Output in the Short RunAn increase in productivity shifts the aggregate supply curve down. It has an ambiguous effect on the aggregate demand curve, which may shift to the left or to the right. In this figure, we assume a shift to the right, which leads tohigher output in the short run. (But effect is ambiguous)


Does technology improvement reduce the natural rate of unemployment?

Price Setting:Price Setting:A

W)1(P μ+=

If A increases, W/A falls, which lowers P given W.

Wage Setting:Wage Setting: ]z,u[FPAW ee=

Ae = the expected level of productivity is incorporated into wages set in bargaining.

NB With Y=AN, 1 unit of output is produced by 1/A workers. So the cost of producing 1 unit of output = W (1/A) = W/A


AW)1(P μ+=

Therefore

]z,u[FAPW

=

In medium run, Ae = A & Pe = P.

μ+=

11]z,u[F n

So un is independent of A

Does technology improvement reduce the natural rate of unemployment?


However un in the medium and long run does not depend on the level or rate of growth of productivity

u in the short run may be affected by the level or rate of growth of productivity. It may go up or down

Summary: Technological progress and unemployment


The Empirical Evidence: Productivity growth and output growth

In Australia, there is a positive relation between output growth and productivity growth.But be careful: correlation is not the same as causation

-6

-4

-2

0

2

4

6

8

10

12

1965 1970 1975 1980 1985 1990 1995 2000 2005

Annu

al ra

te o

f cha

nge

(%)

Output growth

Productivity growth

Research on the effects of Research on the effects of exogenousexogenous movements in productivity growth on movements in productivity growth on output shows that:output shows that:

-- Sometimes increases in productivity lead to increases in outputSometimes increases in productivity lead to increases in output sufficient to maintain or even sufficient to maintain or even increase employmentincrease employment in the in the short runshort run..

-- Sometimes they do not, and Sometimes they do not, and unemployment increasesunemployment increases in the in the short runshort run..


The Empirical Evidence: The Medium Run

Productivity Growth and Unemployment in Australia—Averages by Decade, 1901-2005

There is little relation between the 10-year averages of productivity growth and the 10-year averages of the unemployment rate. If anything, higher productivity growth is associated with lower unemployment, in the medium run.

1951-1960

1960-19691970-1979

1920-1929

1990-1999

1901-19091980-1989

1940-1949

1930-1939

1910-1919

2000-05

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 2 4 6 8 10 12 14

Average unemployment rate (%)

Ave

rage

ann

ual l

abou

r pro

duct

ivity

gro

wth

(%)


Why did Australia do so well from the 2nd half of the 1990s?

Labour productivity surged leading to high Y growth, falling u and low inflation. Why?

• A series of microeconomic reforms from 1980s onwards

• Australia had a very high uptake of new ICT technologies

• However real wages have not kept pace with labour productivity growth, implying that profits have benefitted!

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005GDP growth 3.5 4.2 3.9 4.9 4.3 3.3 2.2 4.0 3.0 3.5 2.4Unemployment rate 8.1 8.0 8.2 7.9 6.7 6.2 6.9 6.5 6.2 5.6 5.0Inflation rate 1.8 2.1 1.3 0.5 0.5 4.1 4.0 2.6 0.9 0.9 0.7Labour productivity growth 0.6 3.3 3.0 2.9 3.9 1.3 0.3 2.6 1.4 1.9 -0.6

TABLE 1 SELECTED AUSTRALIAN MACROECONOMIC VARIABLES

Topic 7

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